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Ian Ritchie : Business AM

Treasury tips the balance sheets to its advantage


Don’t pin all the blame for the market depression on the technology sector collapse

NOW THAT WE FIND ourselves in the biggest slump in markets since the great crash of 1929, it is quite reasonable to ask: how did we get here?

The finger has been pointed at the over-valuation of IT, telecommunications and internet stocks in the last half of the nineties. But that alone could not possibly have caused the extent of the depths of our current market depression.

It may be convenient to blame the technology boom and bust for our woes, but that particular accusation is a bum rap. For all its influence, the technology industry is just one relatively small sector. Why have all the other bits of the economy — retail, manufacturing, financial services, transportation, telecommunications —gone south?

There seems to be a lack of confidence around, fuelled by doubts about what counts these days as normal business practices. Behaviour which seemed to be acceptable a couple of years ago is now seen clearly to be outrageous, even criminal. Activities such as spinning out value-creating activities from an enterprise to the benefit of directors and their friends and families, who then make a substantial return from the proceeds, are now clearly to be condemned. This is in contrast with a decade ago when it was fairly normal behaviour for a Texas businessman such as George W Bush.

But a major cause for the massive loss of confidence has been the mismanagement of shareholders’ interests by a few all-powerful chief executives, finding ways of artificially boosting the value of their shares and then siphoning value from their over heated equity values in stock options and other devices.

This shouldn’t happen, of course. Herein the western world, we have a hundred years or so of experience of how to regulate incorporated businesses, we do this by appointing independent auditors who work for, and report to, the shareholders and not the management. Their job is to seek out such artificial activity and correct for it.

Unfortunately, some of the leading accountancy partnerships which were responsible for audit activities quite forgot the basics of their business. Instead of trying to find and correct artificial methods of boosting market valuations, they chose to make much more money out of advising businesses on new and ever more devious ways of fiddling their books.

The gamekeeper had given up on gamekeeping, and decided instead to go into the business of training poachers.

The most striking examples of excess have been artificially boosting the value of shares and then finding ways of taking value out of the business when shares are at their peak; and also creating off-balance-sheet vehicles to hide liabilities, making the business look stronger than it actually is.

So, I’m sure we can all agree that such practices should be condemned and banished, and that the main perpetrators should be named and shamed - people such as Gordon Brown, the Chancellor of the Exchequer. For, in recent times, nobody has encouraged the development of more off-balance-sheet liabilities than the UK Treasury, in the form of private-public partnerships and privatisations. It may at first look as if the liabilities of a Railtrack, or a British Energy, are no longer on the government’s books but, as we all know, when the chips are down, it is the government that has to bail them out.

And, as for artificially extracting the maximum benefit of over-hyped share prices when they are at their peak, the Treasury could have shown the chief executives of Enron and Tyco a thing or two. They first got into this game shortly after the 1997 election when they extracted a windfall tax from the privatised utilities that were seen to be doing rather too well from the businesses they had inherited from the public sector. Then they imposed a new tax regime on the booming UK pensions industry, taking £5bn (€8bn) a year from the pension managers who were seen, at the time, to be 'rolling in it'.

The fantastically wealthy telecommunications companies were next - they were riding so high on the stock market bubble that the treasury was easily able to extract more than £22bn from them in licenses to operate third-generation mobile telephony licenses.

So here we are in 2002, and the utility companies are having it pretty tough, the telecommunications businesses are crippled with debt, and the pensions industry is collapsing around our ears.

Now I wonder how that happened?


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